KUALA LUMPUR (Sept 24): Hong Leong IB (HLIB) Research has downgraded Westports Holdings Bhd to "hold" at RM4.40 with a lower target price of RM4.67 (from RM4.95) and said the port operator is expecting supply chain disruptions to linger for at least one to two years as some countries may still impose lockdowns should a resurgence of Covid-19 cases occur

HLIB Research highlighted that yard congestion has eased slightly to about 90% compared to above 100% in August. 

In a note today, HLIB Research shared that the management of Westports clarified that congestion at the yard is happening now due to persistent high dwell time for boxes as the pandemic has resulted in disruption of the supply chain globally as a result of various series of lockdowns.

The dwell time for boxes at the yard has increased to 16 days from six days during pre-Covid-19 days. 

For the third quarter of 2021 (3Q2021), the research house said management is guiding a 10% decline in 3Q2021 container volume compared to 3Q2020 but sees the earnings impact limited as the congestion at the yard has spurred more value-added services such as storage and reefer boxes. It has also partially negated the higher operating expenditure from yard inefficiencies and lower port utilisation.

Meanwhile, the report also disclosed that concession negotiations with the authorities for Westports 2 are still ongoing where Westports is hopeful to conclude the agreement by the end of the year. 

“According to management, the dredging and land reclamation works can be carried out as soon as they get the concession approval and they will only need to raise new debt or equity until 15 months after the start of land works,” said HLIB Research. 

Should equity capital be needed, management revealed in the report that it will likely be up to RM1.3 billion as well as a sukuk programme to raise between RM3 billion to RM5 billion to fund the entire capital expenditure of RM12 billion for the expansion. 

Notably, the management is also looking into a dividend reinvestment plan to partially fund the capital expenditure of Westports 2. 

There is also a possibility that the current projected capital expenditure will be higher if steel prices remain elevated at the time the group is building the wharf and buying cranes for terminal use, it added. 

HLIB Research said it is “broadly upbeat” on the proposed expansion plans of Westports 2 and added that the plans are likely to dilute the medium-term profitability of the group due to increased financial risk. 

The increased financial risk, said HLIB Research, will arise from the expectation of higher concession fees and higher depreciation charges or interest expenses upon the commencement of CT10 and CT11. 

“Furthermore, we remain cautious if the yard congestion continues to prolong as the margins could be pressured with decrease in yard efficiency and increase in labour costs coupled with the higher fuel costs. 

Nevertheless, we continue to like Westports for its long-term sustainable business model, recurring and yet growing income from ongoing throughput growth at Port Klang, leveraging on its geographical advantages,” it said. 

HLIB Research said it sees upside to the stock as limited after cutting its earnings forecast by 7% to 10% for FY21 to FY23 to account for the near-term headwinds. 

At 11.10am, Westports dipped three sen to RM4.37, valuing it at RM14.9 billion.